Business leaders must now turn positive ESG talk into long-term results
June 13, 2020
Global Korean Post
As markets continue to grapple with COVID-19, the global demand for oil has dropped dramatically and the price of a barrel of oil turned negative for the first time in history. Meanwhile, S&P reported that investment funds with an environmental, social and governance (ESG) focus are outperforming the broader market during the outbreak. Right now, sustainability can be seen not just as the correct choice ethically, but also the smartest investment choice for long-term returns.
Overnight, COVID-19 showed that with sufficient political will, government support, industry buy-in and public backing, things that were seen as impossible become doable almost instantly. This crisis has seen a focus on ESG issues at industry and government level on a global scale unmatched in history. As the crisis abates, this new sense of global cooperation may provide the blueprint for a future in which business and government can work together to simultaneously protect both the economy and the planet.
C-suite executives should continue to prioritise open communication with government representatives, their employees, investors, clients and unions, through the lifting of lockdowns in order to maintain momentum on ESG issues.
While it is unwise to draw any major conclusions so soon, it seems likely that ESG investment funds have been impacted less dramatically by COVID-19 because they have less exposure to the fossil fuel market. Royal Dutch Shell cut its dividend for the first time in 80 years by a significant two-thirds margin and cut activity at its refining business by 40%. Shell has been attempting to diversify into renewables for some time, and the cut in dividends will give them the fiscal space they need to reposition their business for the long-term and to reinvest in a low-carbon future. Will other companies follow?
Leadership teams have a unique opportunity to restructure their businesses for a post-COVID world right now, as Shell has done. Everything from freeing up cashflow through dividend cuts to making fundamental changes to supply chains and way workforces are structured should be on the table. Brave leadership and bold decision-making are crucial.
Well-known brands that are socially conscious include Microsoft, Unilever and Home Depot; all three have for some time reported a triple-bottom line with an ESG focus, emphasising not only each company’s profit but also its impact on people and the planet. Traditionally, profit is considered by far the most important metric for investors and is also the easiest to measure in a quantitative sense. How can global corporations follow them in placing more urgency on the ESG agenda?
The COVID-19 crisis should prompt investment funds to look at globally renowned brands like these and to broaden their quarterly and annual reporting criteria.
After the wildfires in Australia and Brazil last year drew renewed media scrutiny on issues like pollution, deforestation, threats to biodiversity and species extinction, ignoring ESG issues carries both a reputational and financial risk. In order to translate the positive sentiment toward ESG initiatives currently emerging among investors into action, leaders need to communicate clearly and highlight the tangible benefits – as well as the potential risks – of pivoting to an ESG-led model.
In post-COVID-19 society there will be an inevitable urge to return to the status quo, but companies that ‘waste the crisis’ by failing to innovate may fall behind their more creative counterparts in terms of medium to long-term strategy. Already, 60 powerful German business leaders – including those at E.ON and Allianz – have proposed that any government bailouts be directly linked to climate action. Such a move would provide radical incentives for companies to prioritise sustainability, but would provide little comfort to fossil fuel companies and airlines already seeking bailouts.
Additionally, there are a number of questions still to be answered about investors’ willingness to sacrifice dividends in the short to medium-term to achieve long-term environmental and social sustainability.